Kenya Drought Cuts Coffee, Tea Output; Growth May Slow

Feb. 3 (Bloomberg) -- A drought may slow economic growth in
Kenya for the first time in three years as farmers in the
world’s biggest black-tea exporting nation scale back production
and millions face food shortages.

Production of tea, the East African nation’s biggest
foreign-exchange earner, may decline as much as 12 percent in
2011, according to the Kenya Tea Board. Forecasts for output of
the country’s coffee, sold to Vevey, Switzerland-based Nestle
SA, the world’s biggest food company, and Starbucks Corp., the
largest coffee chain, were cut as much as 27 percent last month.
Kenya’s coffee is considered to be the continent’s best quality
by merchants and its tea is the most expensive in Africa.

Lower crop production “would have a chain effect on the
economy,” Peter Mutuku, senior corporate currency trader at
Nairobi-based Bank of Africa, said by phone on Feb. 1. “It
would have a direct effect on a huge employment sector. Foreign-exchange reserves would also be affected, bringing pressure to
bear on the shilling.”

Kenya relies on agriculture for a quarter of its gross
domestic product and half its exports. The economy, the region’s
biggest, expanded an estimated 5.2 percent last year. Lower
growth than that would mark the first time the pace has slowed
since 2008, when the country was engulfed by ethnic violence
following a disputed election.

If the three-month rains due in March fail, “the worst-case scenario is it could knock 2 percent off of GDP in 2011,”
said Wolfgang Fengler, the World Bank’s chief economist in
Kenya. The current bank forecast is for GDP to expand by at
least 5.3 percent in 2011 and as much as 6 percent if there are
no “shocks,” he said.

The Kenyan shilling has declined 7.2 percent against the
dollar over the past 12 months, trading at 81.08 per unit of the
U.S. currency at 5 p.m. in Nairobi today.

Long Rains

The La Nina phenomenon, in which the surface of the Pacific
Ocean cools and reduces moisture in the atmosphere, may curb
rainfall through 2011, weather forecasters in Kenya say,
following drier-than-usual rains in October through December.

The weather system is the same one that unleashed the worst
flooding and storms in more than 50 years in Queensland,
Australia, and killed 741 people in Brazil, according to Helen
Bushell, regional program manager for Oxfam GB in Nairobi. At
the same time, floods in South Africa have killed at least 123
and displaced 6,000 more, while in neighboring Mozambique, six
people have died and 12,000 forced to flee their homes.

Risk of Hunger

Two-thirds of Kenya received rainfall equivalent to about
70 percent or less of the long-term average in that period,
Chanzu Bernard, an assistant director for forecasting at the
Kenya Meteorological Department, said by phone. It was the least
since 2008, when the country was plunged deeper into a drought
that put 10 million Kenyans at risk of hunger and starvation.

“Another dry spell will dampen growth momentum,” Yvonne
Mhango, an economist with Renaissance Capital Ltd., said in a
research note on Jan. 26. She expects growth to slow to 4.9
percent this year from 5.3 percent in 2010.

Other countries in the region are also experiencing dry
weather. Neighboring Somalia, in the throes of a two-decade
civil war, has been affected. Somali Prime Minister Mohamed
Abdullahi Mohamed warned of “catastrophic” consequences from
drought unless the international community provides aid for its
agriculture industry. As many as 2.5 million people in Somalia,
home to 10 million, may die, Mohamed said Jan. 14.

Island Boreholes

Mauritius, off the east coast of Africa, is considering
digging boreholes to alleviate water shortages, the government
said in a statement on Jan. 19. More than half of Uganda’s 31
million people face food shortages because of drought, the
country’s parliament said in October.

The four affected countries account for about 6 percent of
the sub-Saharan African economy, according to World Bank data.

“There’s no getting away from the fact that if there is
bad rain, that none of the East African nations would be able to
weather it regardless of how other industries look,” Razia
Khan, head of Africa regional research at London-based Standard
Chartered Plc, said by phone.

Average prices for African tea may rise to $3.50 a kilogram
by midyear, Aly-Khan Satchu, a Nairobi, Kenya-based independent
financial analyst, said in an interview on Jan. 27. Prices
averaged $2.69 a kilogram at a sale on Feb. 1, according to Tea
Brokers East Africa Ltd.

“I’ve got a super conviction that the whole basket of the
breakfast commodities, which includes tea, coffee, sugar and
cocoa, is all in a parabolic price move,” Satchu said. “While
tea has been lagging the price move, it is now going to play a
degree of catch-up.”

Tea Stocks

Rising prices may also bode well for Kenyan tea companies,
including Sasini Ltd., whose shares have risen 63 percent in the
past year, and George Williamson Ltd., up 54 percent. The
combined market value of the two companies is about $55 million.

Shares of Eaagads Ltd., a Kenyan coffee producer, have
almost tripled over the past year to 58 shillings, while Kakuzi
Ltd., a tea and fruit producer, has more than doubled to 77
shillings in the period. The two stocks are the top performers
in the Nairobi Stock Exchange’s All Share Index since Jan. 1,
2010, according to Bloomberg data.

Kenya ships tea to as many as 38 destinations. The U.K.,
Egypt and Pakistan are among the top five importers, according
to the Tea Board of Kenya.

The average price of African tea rose to $3.05 a kilogram
in mid-January, approaching a record high of $3.11 in December
2009. The leaves are traded at an auction in the Kenyan port
city of Mombasa, the world’s largest such sale.

‘Sustained Demand’

“We are seeing sustained demand for quality tea,” Nick
Munyi, managing director of Finlays Mombasa, a unit of John
Swire & Sons Ltd., said in an e-mailed response to questions.
Finlays Mombasa grows, processes and trades tea in Kenya. “If
there is drier-than-expected weather the tea markets are likely
to be stronger due to shortage of supply,” Munyi said.

Kenya cut its coffee production forecast for the 2010-2011
season through September to 40,000 metric tons from a previous
estimate of as much as 55,000 tons, the Kenya Coffee Board said
on Jan. 17. The country grew 45,000 tons last season.

Over the past three months, basic food items including
corn, beans, rice and cooking oil valued at 1 billion shillings
($12.3 million) have been distributed and water boreholes
drilled in drought-affected areas, said Andrew Mondoh, permanent
secretary in the Special Programs Ministry.

Kenya has a better chance of coping with this dry spell
because domestic prices for corn, a staple food, have fallen
about 50 percent from $400 a metric ton in July 2009 during the
height of the last drought, said Fengler of the World Bank.

“The problem is that we haven’t moved into a situation of
a significant recovery” in rainfall since 2009, said Bushell.
“Economies were picking up, and now that threatens to be
significantly undermined,” she said. “If the next rains do
fail we may have significant humanitarian crisis in the
region.”